AvalonBay launches its first dedicated build-to-rent business to capture growing demand

On the south side of the 12th fairway at the Falconhead Golf Club just 14 miles outside Austin, Texas, terra-cotta roofs from opposing rows of newly built single-family townhouses stretch out along Ryder Gray Drive. The quiet street is ground zero in a demand shift in the U.S. rental provider industry.

The development, opened in 2022, is now owned by AvalonBay Communities, one of the largest traditional apartment landlords in the United States. The company bought the property, now known as Avalon Townhomes at Bee Cave, in late October for $49 million.

The deal marks the company’s first foray into dedicated build-to-rent acquisitions, an asset class that has attracted billions of investment dollars this year from major institutional players including Blackstone and Pretium Partners as demand for the property type is projected to accelerate in coming years.

AvalonBay is among the initial major publicly traded apartment real estate investment trusts — often known for urban luxury developments — formally embracing build-to-rent, typically suburban residences that feel more like single-family homes. The move is part of a strategy to accelerate the REIT's expansion into markets in the Sun Belt and Mountain West while capturing outsized demand.

“What we are seeing now is a confluence of two factors creating a tailwind for build-to-rent,” Stew Royer, senior vice president of investments at AvalonBay, said in an interview, including a wave of millennials aging into their prime household formation years and a structural undersupply of housing that has contributed to rising home prices.

“When you try to match these demand drivers to existing supply you find that there is a real need for professionally managed, purpose-built communities to service these residents,” he said.

Formally announced on the company’s third-quarter earnings call, that AvalonBay’s dedicated build-to-rent purchase at 4810 Brisa Way in Bee Cave consists of 126 townhouses ranging from three- to four-bedrooms and averaging nearly 1,600 square feet. Many units come with private yards and attached garages.

Rent growth at the property has outpaced the overall market by more than 15% over the past year with an 11.6% expansion compared to a 5% decline in asking rents across the Austin market, according to CoStar data.

Initial investments in AvalonBay's build-to-rent business are likely to focus on the REIT’s current real estate footprint, where it knows its customer and the market and can leverage existing operations. To that end, Royer pointed to suburban areas within Texas, North Carolina and Colorado as markets that could attract the company’s attention.

“Given the land requirements needed to deliver build-to-rent homes at scale, particularly with respect to single-family detached homes, we expect nearly all of this product to be suburban and likely weighted towards our expansion regions,” he said.

Executives on the company’s earnings call did not specify an expected development pipeline but said the REIT has “dedicated resources” toward build-to-rent projects that would be “an area of incremental emphasis over the next 12 to 18 months.”

In the shorter term, AvalonBay is expected to look toward acquisitions of existing or developer-funded townhouse projects that can get off the ground quickly. But the company also plans to look at in-house development and purpose-built detached single-family projects with a target of 80 to 130 units.

“Expanding further into build-to-rent is really a continuation of what has always been our core strategy,” Royer said. “Moving forward, we plan to bolster this product type in our portfolio through additional townhomes, as well as adding single-family detached homes, both within larger communities that also include stacked flats, and in smaller properties that are 100% build-to-rent product.”

Based on that experience, AvalonBay predicts yields from its build-to-rent projects to be in line with its more conventional multifamily offerings. While differences exist across markets and among properties within build-to-rent, research from other multifamily firms including Middleburg Communities — historically a traditional apartment developer that has also made a strategic pivot toward build-to-rent with investments totaling more than $700 million — have found build-to-rent outperforms traditional multifamily in both rent levels and annual rent growth.

AvalonBay's competitors including multifamily REITs Mid-America Apartment Communities and Camden Property Trust averaged just 0.1% growth in annual rent prices as of the second quarter, Middleburg research showed. New leases across the companies’ portfolios were down 4.2% over that time.

In contrast, build-to-rent operators such as American Homes 4 Rent and Invitation Homes — a firm that has promised to invest $1 billion in expanding its portfolio this year — averaged an annual growth rate of 5% in the second quarter.

Aaron Tishkoff, assistant vice president of acquisitions at Middleburg, told CoStar News the company’s build-to-rent portfolio has generated 15% to 20% premiums over rents for similar-sized conventional multifamily units.

Though the build-to-rent space could face some short-term softening from a too-much-too-quickly supply surge, according to investment firm Northmarq, the asset class is expected to benefit from long-term undersupply issues that have driven up prices across the U.S. residential real estate market.

Hunter Housing Economics, a firm that provides market studies for build-to-rent projects nationwide, estimates the United States will be short 63,208 build-to-rent units this year. In 2025, the shortage of build-to-rent units is expected to increase to 76,466 units.

“There's going to be a huge surge in pent-up demand 12 to 24 months from now,” Brad Hunter, founder of Hunter Housing Economics, said in an interview.

Still, build-to-rent is not without its risks. Most recently, Invitation Homes reached a $48 million settlement with the Federal Trade Commission in what the agency said was the first action to come out of its newly formed Renters Working Group. The issue of investor-owned housing has also caught the attention of lawmakers with bills in both houses of Congress and at several state legislatures aimed at discouraging institutional homeowners through taxation or forced dispositions that may face added uncertainty from the incoming Trump administration.

“We are not investing in scattered-site, single-family rentals. Our focus is on purpose-built, contiguous built-to-rent communities,” Royer said. “These communities are additive to the housing stock at a time when we desperately need more housing of all types, and we believe build-to-rent-style communities can fill an important gap between renting traditional apartments and homeownership.”